Saturday, September 2, 2017

Premium Wine Sales Decelerating

The Big Short

It's easy to tell people what they want to hear. It's harder to tell them what they don't want to hear.In 2007 I saw the above chart that tracked US home prices versus median family income. With other indicators in the market, I was convinced there was a real estate bubble already in the process of bursting and I started talking about it in speeches. The result of my prescience? I stopped getting speaking invitations and in one speech had the organizer ask if I could be a little more cheery. People don't want to consider the downside risk in business when things are going well. If I told you today what you wanted to hear, I would say that wine consumption is growing in both volume and dollars and consumers are continuing to trade up above $9.00. I would tell you that grape prices are at an all-time high and trending higher right along with land prices. That's true and might get me more important speaking engagements, but I'd rather you know about an underlying trend I'm seeing that's more than a little concerning. If I'm right, it's going to change the way you are thinking about business right now.

Winter Is Coming

While premiumization is in full force and the wine business is still growing, today we are at a tipping point: The growth rate in premium wine is decelerating and has been since late 2015. Let me say that in more defined terms: Using Nielsen Scan Data in the chart titled Growth in US$, you can clearly see the rate of growth in wine priced above $9.00 is declining. That's not saying wine sales are declining, but rather the positive growth rate we've seen in premium wine for a very long time is clearly decelerating.

By middle 2018 to the start of 2019, if the trends hold, wine as a category will have zero growth. That doesn't seem right to me intuitively. Isn't everything moving along well in premium markets? On the surface that seems to contradict everything else being written today. Can't I just be a little more cheery?

Disbelief & Skepticism

The first thing I do when I see surprising, contradictory or confusing data is understand bias and question the context. It's possible to get bad information from otherwise good research.

Nielsen data are biased to wine sold through wholesale. It excludes some non-traditional channel information like Costco, DtC sales, and some private labels like Aldi and Lidl that don't participate in syndicated data collection. So it's possible the decline isn't a decline at all, but a channel shift Nielsen doesn't pick up. Costco is the largest wine retailer and has close to $2BN of wine sales annually. DtC could also impact the Nielsen trend as there are more than $2BN of sales in that channel too, and sales are clearly growing there.

Looking at public information, Constellation's quarter ending 3/31/17 showed wine sales trended lower by 3.8%, but they attributed that to the divestiture of their Canadian wine business. The sales decline is still an interesting fact because here we're talking about total sales declines in a premium wine company, not just declines in a growth rate. Still, their explanation is plausible. No matter what, I always have a hard time dismissing obvious trends from Nielsen, so we need to dig a bit deeper.

Average Winery Sales & Shipments

At the present time, trailing data from financial statements we collect don't show any trend. FYE 2016 sales for premium wine companies averaged 9% growth last year; close to the same rate of growth in each of the prior 3 years. But our data are perhaps too much of a lag on the current market indicators to be meaningful in this case.

Gomberg-Fredrickson data from year-end in the chart above give a slightly different view. They are showing shipments from warehouses have slowed, roughly equivalent to what Nielsen is showing in the time line. GF data does include DtC and Costco shipments. But as noted in the chart heading, the shipment declines were attributed to short vintages; a secular change that arguably would reverse if there were more supply. Is it secular?

Total Consumption In Volume

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In the State of the Industry Report last year, I predicted a decline in per-capita consumption. This year I had to acknowledge I was close but still wrong in that call. There was a decline in the slope of the growth rate trend of sales by volume, as noted in the chart above. That's been the case for a few years now. But per-capita consumption of wine is still positive. No matter, it's important to note that this chart is once again consistent with the Nielsen data that's showing consumption trend slowing, at least by volume in this case.

Qualitative Data

There are so many more directions I've been going trying to track down a clear view on the market trends and impact. My sense at this point is there is change afoot, so I've spent a fair bit of time speaking to other people in the Beverage-Alcohol industry who I respect. Interestingly, all of them reported seeing the same thing, but through a different lens:

In discretionary consumer and mass luxury, many companies are fighting secular changes from the Amazon Effect, but consumer preference changes are also part of the dialogue. Tiffany, Michael Kors, Ralph Lauren, Nordstrom and Coach are all dealing with disruptions particularly in the US. Luxury retailers are trying to come to grips with an evolving consumer.

Grape and wine brokers tell me the grape market is quietly slowing down even for Napa Cabernet and it doesn't appear to be harvest related. Price expectations of sellers aren't in line with winery buyers. Wineries note that sales growth isn't as strong as they'd forecast and they aren't looking to increase their purchases at this point in the business cycle.

A respected beverage economist tells me high-end spirits reached a saturation point in late 2015, carrying into 2016. That's very consistent with the Nielsen data above.

More than one winery owner has told me sales of wines over $75 have been more difficult this year. That's not a unanimous POV. Other clients who sell in that tier of wine aren't seeing a change at all. Brand strength seems to be the biggest factor, but it's still one more qualatitive data point.

What's Does It All Mean?

I'm not done with my research - and I really do want to be more cheery but my early conclusion is we are at the start of a long term secular market change,meaning what's ahead is something we all have to embed in our planning, because it will impact grape prices, land prices, wine sales, and the current M&A market, even success in general at some point. But what's the trigger that's behind these observations?

I have an explanation that ties all this together, but it's going to take too long in a blog to lay that out today. I'll do that in a separate post when I can get a few hours free.

For now, I'm really curious what you are seeing in the business and hoping you will add to the discussion so ....

Weigh in with Your Observations and Opinions!!

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57 comments:

Really interesting stuff Rob. Our wine biz is all DTC and at a premium price point, but I think grape prices as well as other "wine biz" goods and services are in a bubble position and I think they could collapse.

McPherson. I appreciate theverything comment. DtC as a channel is growing but not all wineries selling via DtC are seeing growth. Larger wineries are working more diligently at starting their own direct programs, and I believe the model that requires people visit a tasting room to be in the wine club - that model is going to run out of gas in Napa and Sonoma.

I'm not predicing a price collapse in land or grape prices either. But demand for wine, and the price of land and grapes are linked. If we are seeing the edge of secular demand changes, we could see lower grape and land prices at some point. At a minimum, the trend of grape prices climbing higher each year could be running on borrowed time if wineries are slightly overstocked.

In 2006-07 I hardly meet with anyone (I'm actually a financial planner by day) that didn't tell me they were going to buy real estate and become a landlord. Then I knew we were nearing a tipping point...the old adage if your dentist is buying you better be selling never rang more true.

If your observations and experienced based perspective are becoming a whispering nag, them more likely than not you are on to something. Most likely something that can't be prevented as it is already in motion. But understanding what might be behind it could provide some opportunity to plan a move to the sidelines and when to re-enter the market.

My gut on this trend and other retail consumption trends is it is related to the fact that the largest percent of the population was born prior to 1967, over 50 now. History has shown that after age 50 individuals spend less each year going forward on stuff. While the millennials are creeping up on the "boomers" it is only the front end of them that is wading into the pool of mass consumption. There is roughly another 7-10 years before the millennials have a large enough presences in the prime buying age bracket to stimulate another rally like we saw from 1995-2000.

R. Coming to this discussion as an importer and operating in the value category I realize much of what you are sighting is CA super and ultra premium categories. We are about 50% restaurant and 100% through 3 tier system. there is no doubt the markets out here are anything but biz as usual. Chain Grocery and Chain restaurant continue to shake up new markets. The multinationals are getting stronger at a time where consumers seem to want brands from more specialized producers - maybe they are telling us something. But my big question is if we are going into a time with flat to down growth as it was when i started in the business in 1991, then what are consumers drinking (smoking)?

For those of us in our 50's who have watched many economic cycles over the last 30 years, we might be inclined to see a "scheduled" recession beginning in 2018/19. But since the Great Recession, the Fed's influence has wained seeming to make things much less volatile, and that we may have broken that economic cycle of boom and bust. If we continue to grow the economy 2% annually, do we have a longer than normal run of growth, and is it possible the wine consumer is simply taking a breather and delving into those cellars they have been collecting?

The Fed has yet to unload all the assets it purchased during QE of the last recession, effectively putting them in a very weak position to help next time. I don't think there's anything that can be done to break the boom/bust cycle.

Gillett - Thanks so much for your perspective and giving your reference point. To reiterate your comment;1) Business isn't 'as usual' from your perspective which is the value category.2) Consumers today want more specialized brands.

In the value category, I think we have seen that trend for some time now with young consumers wanting lower priced premium wine - but they know what good means. You probably see that with imported French rose, NZ Sauvignon Blanc, and Italian pinot grigio growth. But for >$9 wine, slowing growth rates are pretty recent.

To your comment about the flat growth of the early 90's - that was a time when there was an anti-alcohol movement due to increasing the drinking age, among other factors which led to per capita declines.

It's more difficult to sort out per capita data in alcohol because the 'capita' part is either total population, total drinking population, or total potential drinking population >21 depending on who does the math. Intuitively I think we should see decines in per capita growth rates (volume), but different publications show a range of declining consumption, slowing consumption, or still increasing consumption per capita.

Wineries managing inventory levels more effectively and keeping current on vintages is something that could effect wholesale deliveries and the downtrend due to short vintages. Not keeping "library" wines and blowing out vintages (to online discounters/Costco/Trader Joes) to stay ahead would make financial sense and improves the cash flow of wineries. If well regarded premium and above wineries like Caymus and Daou are releasing 2015 Cabernet back in the start summer of 2017, that should indicate shorter cellar times and quicker release schedules. I do the same thing. American consumers want the most recent vintages, not that "old wine" to channel Steve Martin in The Jerk.

Related to your auto sales statistic, here's some additional data in the auto financing space that points to concerns https://qz.com/913093/car-loans-in-the-us-have-hit-record-levels-and-delinquencies-are-rising-fast-too/

Could there be a trend in the perception of value decreasing for premium and higher priced wine? Could that trend be related to an Amazon Effect or a Transparency Effect (that a CA wine sold to a distributor at $11/btl gets sold in Maine for $30/btl) at the 3-Tier Level? Wine would be perceived by consumers as expensive or offer no value based upon local alternatives.

Or perhaps a "Locals Trend" that isn't seen in the data? Consumers can visit multiple local wineries in all 50 states, opting for a local "experience" that justifies buying local. Combine that with local brewers and distillers in the several states, that provide an experience over simply buying wine (with no "experience") and paying shipping for CA wines. Local wineries in each state may warehouse on-site and ship directly, both of which would not be in your data.

Seeing both the velocity and volume of interstate wine shipments from FedEx/UPS would help define the trend, however that data may not be available, as that would pickup the DTC market to a degree.

The reason I post my views on tomorrow is I hope to start a discussion. This is a trend I've been watching for the past 6 months and has been discussed amongst those of us who track the business. We are each trying to figure out the why's better and to your first comment about managing inventory, getting this information in the dialogue is important for everyone in their planning.

Maybe we flatten out at a lower growth rate at some point soon, but if I'm an owner of a winery, this is the kind of information that's important to have.

Thanks for the link to the auto sales article. I'd forgotten that there was a spike in loan delinquencies which is another indicator worth following.

If you know how to get hold of trended information on total wine shipments via carriers versus the way I cobble it together, please let me know! That would be a great data point to have.

US auto sales are declining because they were setting record sales year after year due to significant slow down during the recession. It's a sign that anybody who wanted a new car now has a new car, not necessarily that the US consumer is hurting.

Mike -Thanks for trying to poke holes in my thinking. That is the point of starting a dialogue. I'll agree it may be the least important of the qualitative points I raised because it truly doesn't necessarily mean the consumer is hurting. It could mean that people are driving cars longer and this is the natural effect of reaching a high-point given all the delayed purchases of cars post crash. Or it could be that there is a change in consumer preferences with a stingier consumer. Or it could be that the Uber generation is coming into their own in this product class.

There are many reasons this data point is irrelevant to the discussion, but enough where I can't exclude it from the discussion either.

Thank you for the insights. If you ask most folks in mostly DTC models (such as ours) I can tell you we are all concerned. I started seeing lower guest counts and reduced sales after the July 4th holiday. Something just hasn't "felt" right since then. I've been asking around with friends and colleagues in both Napa and Sonoma and most everyone says traffic is either down or way down. I wonder if this is a sign of things to come?

Bill -Thank you for your comments. I would like to be cheery in my response because I still hope to get some speaking opportunities this year - but ...

I hear the same comments about visitation from all the other regions except Oregon, and the decline showed up in the State of the Industry Survey last November as a single data point. That said, single data points don't make a trend and of course, visitation and spending are different.

It's important to note that tourism in both Napa and Sonoma were both up year over year in 2016. Hotel occupancy rates and average room rates are higher as are Transit and Occupancy tax collections.

If visitation is down and DtC is up as was the case last year, that is an interesting fact to research more - and I can assure you we are doing that very thing.

From an observer in Napa Valley... My totally unscientific observation is that there were fewer limos/buses driving up and down Napa Valley this summer and smaller lines waiting at Gott's Roadside in St Helena during the lunchtime rush. Having watched visitor traffic patterns and the fluctuations both pre and post recession, that seems like a sign.

Anon 11:21Thanks for your comment. It's important to underscore that the Nielsen Data are reporting sales increases still. Your data differ only in that you were stable largely, but with an uptick recently.

I have yet to see anything that is scary from our client base. That said but most of our customers depend on DtC and by all accounts that is still increasing. So it may be a tide that's not reached DtC, or it could be some other factor at work.

We just aren't sure if the canary is tweeting about gas in the mine, or the fact the someone forgot to feed him. More work to do in this, but I expect to post a second blog on the topic when I can get some hours to research and write.

I still see accelerated consumption of Oregon Pinot Noir, Washington Cab, Red Blends, Pinot Gris, and Sauvginon Blanc. Single varital wines in other categories, especially Riesling have steeply decelerated to a crawl.

Another reasoned, thought provoking post - thank you. I do wonder if there was vintage related seasonality at play. Coming off highly touted, large vintages in 12 & 13 - the very good, but not 12-13-15 2014 vintage was a tougher sell, economics be damned. Compounding the issue -- 2015 was a much smaller vintage yield-wise, so there might be some other factors at play here.

With respect to Nielsen Data, vintage wouldn't play into it. That includes both domestic and foreign wine sales. If demand were there, it would be filled by foreign wine. Large wine companies are pretty quick to identify and exploit opportunity.

We are seeing a very interesting shift towards frugality that I believe started a long time ago. Could there be a political connection? Are people more interested in staying at home and watching CNN and Fox News as their favorite source of entertainment vs going to dinner and a movie? Ok, politics aside, we sell premium wines both Wholesale and DTC. What we are seeing is not short-term and we are not going back to the way “things were” or what we considered “normal”. Just think about the massive shift of focus wineries have invested in their DTC businesses over the past 5-7 years. How bombarded with email, social media, and phone offers can one consumer get before it’s just old. Not to mention, receiving wine at home is no longer “cool” and I’m not talking about temperature. It’s a pain. You combine this with the vast majority of premium wines now being offered on online discount sites, Costco, Safeway, etc… There is an ocean of great wine out there and we can’t ignore it nor drink it all. Those that are not diversifying the revenue side of their business and continuing to answer their “why us” and establish relevancy in a hyper-competitive environment, may be a bit surprised by how bad just a minor downtick impacts cash flow. 10+% in DTC buying habits for a small DTC majority brand can be catastrophic. Add the lag effect and compounding and forget about it.

I have never experienced a time in Wholesale like the past 18 months and especially since Q1 2017. It’s incredibly difficult to sell premium wines and get them to pull through the system. Our category (Chard and Pinot) is particularly crowded with an onslaught of new brands over the past 5 years and record yields over that same period. The amount of inventory in the system is just scary. And remember, we are not only competing with Chard and Pinot, we are competing with the world of wine. Price points are our competition and the “lower” price points have increased quality across the board as well as introduced “hipster” niche varietals that make wine just more interesting to a certain segment (which tends to align well with restaurant buyers). Another challenge we all face in Wholesale is the discount loop never reset from the great recession. Simply selling wine at full price, on its merits, on its pedigree; days are gone. The past few quarters have felt like a race to the bottom. I have seen the price come down on wines that would have in “normal” times, not even consider retail exposure and could easily get by being “on-premise only”. I don’t feel like less ($100+ bottles) higher-end wines are pulling off wine list but the % of list you garner today is vastly different than just say 5 years ago. It’s all just sort of fascinating.

On frugality, ask yourself, do you buy ANYTHING at full price anymore? I don’t. I expect to get anything I need cheaper on Amazon or at Costco. If I can’t find it cheaper, I ask for a discount. I can’t imagine we are alone in this? My Wife and I are in our 40’s and two kids are 17 and 15. What scares me the most, we should be your target consumers with our kids falling in line 10-15 years from now. They are more frugal than we are!

Jason,Thanks for logging in and commenting. You remind me of Jon Snow trying to convince Queen Cercie the White Walkers exist. It's all too gloomy to believe, and if you keep this up I suspect there will be no speaking invitations for you either. BUT ...

There is much to agree with throughout, in particular, the last paragraph. I've called the millennials Frugal Hedonists for some time now. You are perhaps a little ahead of your time in the race to frugality but your comments are one of the issues I feel is at the centre of the deceleration. As I've said, I want to study a little more and get some more proof, but I think we are at the beginning of the end of the boomer era. The millennials will soon be taking over Kings Landing.

Americans have been living "high on the hog" and on borrowed credit for decades, we're now $20T ++ IN DEBT. Yes, at some point in the future, Americans will have to live like the rest of the world, until then everyday drinking wines for $20-$30 will still flourish. Good luck to those wineries though when the day of reckoning happens :)

Anon 9:38Thank you for your comment. While I agree about your comments regarding excesses of Central Bank intervention, my encouragement for you is to be more cheery. Living life waiting for fairness to come back into the system for those left behind, at the cost of seeing everything crumble around you is a pretty gloomy way to live. It's a beautiful day outside!

As a small winery, we pour and talk to customers everyday. I might add I spent 30 years in tech & consumer market research, so I ask questions and collect information.

We started to see the deceleration right after a great sales year in '15. The next year ('16) was OK but not great and 2017 is continuing the trend...in spite of more marketing, better wines and no price increases.

Something is happening, Mr. Jones.

My conclusions so far seem to support both the aging baby boom hypothesis and the "too many choices" influence. The leading edge of the "egg in the snake" (post WW2 boomers) turned 71 this year. They are drinking less for health and economic reasons.

And then there are too many choices: when we started in the '80s there were less than 2 dozen wineries in our area. Now there are over 700, mostly making the same varietals. Not much differentiation there. I thought we'd see more shake-out in the Great Recession (banks letting debt slide helped). But now I think we're bucking the combined effect of an aging market, too many wines and over-leveraged operations that are finally having to pay the piper.

Trees still don't grow to the moon. I'm not predicting a hard crash yet, but it is certainly not a time for the faint of heart.

Cliff - I appreciate you signing up, logging in, commenting and bonus points if your real name is Cliff Anderson. I love people willing to take a position and not do it behind anonymity.

I like the too many choices theory. That might be the same as the emergence of the millennial though. If millennials are starting to influence fine wine, how many of the existing labels can they know about?

No Mr. Smith, trees do not grow to the sky. But preferring to be a little cheery here, they can brush the clouds and they never have to collapse, no?

Choice, like freedom, can be a burden. But in an election year, it seems appropriate that the act of choosing should be a major theme in several of the top 10 business books of 2004 as selected by BusinessWeek reviewers. . . .

What if the cornucopia of choices facing all of us becomes overwhelming? Barry Schwartz's "The Paradox of Choice: Why More Is Less" (Ecco) describes how Americans are increasingly flummoxed by the necessity of selecting from a vast and growing number of alternatives in almost every sphere of life, from consumer goods to 401(k) investments to religion. The professor of social theory at Swarthmore College provides a survey of social scientists' research into how people make these judgments: We learn why the most diligent pre-choice research tends to get trumped by anecdotal evidence, such as a friend's recommendation, and why consumers sometimes cannot decide and leave the store empty-handed. Schwartz exaggerates a bit, as when he links rising societal levels of depression to the "relentless" experience of disappointment over decisions made. On the whole, however, his book is absorbing, witty, and persuasive.

See this related book review . . .

From the Los Angeles Times “Health” Section(March 16 2009, Page E3):

“Hit With Decision Overload;Faced with too many choices, the mind can stumble, experts say.”

I'm a certified sommelier at the third or fourth biggest bevmo in the chain, Laguna Niguel (pretty upscale area). Low end sales are on the rise (sub 10$), low to mid market (sub $25) is notably increasing and the high end is very slow in all major varietals - white and red, Chard/Pinot/cab/malb. Pinot at 40 plus is dead slow. Everyone is shopping for higher quality and being quite tough about it, buying only great deals and exceptional offers in known brands or on the personal trusted recommendations.

speaking from a POV as a winebroker in Cali, the market is 100% saturated .. we've reached a tipping point. Wineries MUST focus on DTC and be grateful for whatever on-prem biz they can get at this point.

Anon 9:31I think the news about the need to go DtC is well out of the gate at this stage. That said, tactics regarding DtC are the questions that should be at hand. We are well below optimized marketers when it comes to the science of direct sales.

Rob, I'd love to meet up and talk about these issues a bit. I am doing my own research looking at a 2018-2019 shift in grape pricing dynamics. One thing, though, is that W&V/WBM is reporting very large increases in DTC, which has much higher margins than wholesale and, of course, distribution. Do you buy that data?

Gabe - all data has bias, including mine. You have to understand what the bias are, and as a primary data source, be transparent about what bias exist. I do question the month to month swings in reported DtC stats ... up 30% seems a reach for instance, but the direction of the longer term data trends seem good. I've talked with the folks compiling the data as well and I think on the whole, its as good a reflection on DtC as we can find.

Net profit hasn't changed that much in the past 10 years while DtC has dramatically advanced at most wineries. People forget the direct sale has a ton of overhead that should be allocated to fairly compare the gross profit of direct vs 3-tier sales. That's never done and if it were, I'd say its about a toss-up.

Hi Rob,We are mostly DtC and 2017 is shaping up to be our best year ever. Our sales are up almost 30%. As you know, we are a very small producer (less than 500 case production) out of Oakville so our data isn't really indicative of the overall market... but I thought you would be interested to know.Cheers,Stuart

I'm a dinosaur...independent retailer in the San Francisco Bay Area. We are viewed by many wineries not as their ambassador, but as a competitor. This is foolish in my view. Sales in the $5-$10 are strong, as are sales from $10-$20. From $20-$40, things seem to be okay...the notion that $50 is "everyday wine," though, a dynamic we see from many Napa vintners, is mistaken. And the "elevator" for those wines retailing from $50-$250 is very crowded. In attending recent trade tastings I can report there is great optimism on the part of many wineries which offer $75 bottles of Sauvignon Blanc and $200 bottles of Cabernet. When queried about the elevated pricing, we routinely hear "We only made XX-number of cases." We call this the "Scarcity Tax" and only a small percentage of consumers is interested to pay that. I wish I could say the wines were truly superior, but in fact, not many offer more complexity than similar quality wines selling for $20 to $50. We, though, are confident a percentage of the wine market appreciates a local wine merchant with a discriminating palate and who knows the value of a Twenty Dollar bill. Navigating the choppy waters of wine is more difficult today than ever, though. And we see producers hoping to sell us wine at full wholesale pricing, while they sell to chains at such low price levels their wines can be purchased by consumers for less than the normal wholesale price! (A winery just showed us a Chardonnay...$292 front line. $240/case on three. Yet a chain store is retailing the same wine for $18 a bottle.)

There's also the remarkable dynamic of offering "on premise" pricing as dramatically lower prices in hopes of gaining market share. One (more than one, actually) Napa Cabernet producer asks $400/case wholesale to retailers for a wine they can afford to sell to on-prem accounts for $240/case. It seems part of the challenge of wine marketing is the wholesale level is in total chaos.

The short story regarding on-premise vs off-premise pricing is for off-premise, wineries worry about pricing power in the retail market, it's not just about market share. The winery is also concerned that if they are from Healdsburg, as I am, that they may visit the winery and your wine shop. The consumer may see a huge pricing discrepancy between the winery retail price and your retail price (off-premise) that they would not see in a restaurant (on-premise).

Using your example $240cs on premise will probably be a BTG wine at a restaurant in SF or sold by the bottle for $70, with perhaps a 3 case minimum. If the winery sold to you for the same price as the restaurant (on-premise)and you sold it for $30/btl retail or even $40 retail that would undercut the price at the winery and the price at the restaurant. The consumer would then buy the wine at your store for $40, take it to the restaurant and pay the corkage of $25 and still get the wine cheaper than the restaurant price of $70. And if you're a regular customer of the restaurant, they may even waive the corkage.

So the winery has a choice to make, establish a relationship with the retailer, one case at a time and hope you get behind it or drop three cases of BTG wine at a restaurant and expose the wine to more mouths in a week and potentially get a re-order of 3 cases every two weeks if the staff get behind a "new" wine.

It's tough for us boutique wineries from a cost versus exposure standpoint. Some of my on premise retailers, like yourself, price check my wines in front of me on the internet with Vivino, Cellar Tracker, etc. You want the best possible price, I get it.

Off Premise Retailers are put in a tough spot because of the internet and online retail discounters. Many of my customers are just like you. I offer wines to you, as the off premise retailer, that I don't offer restaurants. That's the only way I can keep pricing appropriate for both markets, off and on premise. They have to be treated differently, because your business models are different.

Not every winery or wholesaler has come to the same conclusion.

Nice insights on the Scarcity Tax. I tend to agree. And economically, there's no way a winemaker based in Sonoma County could sell you a wine wholesale under $10 and expect to make any profit or a living as a winemaker. With customer crush fees over $1000/ton and fruit costs of $2500/ton or higher there's no way that happens.

"There are signs the American economy is improving, at least as far as wine shops are concerned. But if you think that means a return to the glory days of $150 cult Cabernets . . . well, not so fast.

"Instead, most wine store owners . . . are describing a new normal, one in which the high-margin sales of wines in the $50 to $150 range are difficult -- indeed, some would say they're almost a thing of the past."

As a Wisconsin wholesaler, we are certainly experiencing this wine deceleration. Wine shipments to the State are down 0.08% thru June. Most telling is that Overwine shipments, the playground of high-end Napa wines, is down 5.6%.Wines over $50 retail are mostly glued to the shelves. Wines over $100 on a wine list are collecting dust. Pedigree and scores don't count anymore.As wineries release their allocated wines this Fall, we'll be buying less of them, or none of the ones where we're still sitting on last Fall's allocations.

Jeffrey - thanks for the comments. Great hearing a wholesaler's perspective on the street.

I'm not sure what it means though. We hear both sides of the argument with some wholesalers/retailers complaining that they can't get allocated wine anymore... that producers are going instead straight to consumers and cutting middle-men out. On the other hand, we hear comments like this one too. How do we make sense out of it?

I think both can be true. If the allocated wines are moving, you will buy them for resale. If the allocated wineries want to sell 100% direct and cut out retailers, they can do that too.

I think two things are important to remember. 1) relationships matter - and they matter both ways. Producers and resellers of wine have to have a long view so give and take are important to consider.2) brand building requires getting wine to the consumer in a consistent manner. If the wine is available one year and not the next, the consumer in that given region will replace the love of one brand with another available one.

Unless the said "allocated" wine has an extremely high turn-rate and low path to resistance, I would be shocked if any wholesaler (big or small) would complain about not receiving allocations. We could probably count on one hand the brands that truly fit this mold still today.

Jason - True allocated wineries are about as rare as dragon glass. But like dragons and white walkers, they do exist and retailers do complain about their allocations getting cut. Obviously nobody complains about missing their allocation on wines that don't move. (What am I going to do this Sunday with Season 7 over?)

Gabe - It's hard to draw conclusions from the indicative comments about the business of tasting rooms. I can't at this point say that sales in the tasting rooms are impacted but I've heard others talk about visitation being off. You have to juxtapose that with the information that occupancy rates, room prices, and tourism otherwise seem to be up. That's a hard one to reconcile if we really think tasting room sales are off. #TooSoonToSay

During my travels to small high-end (ie over $50 Pinot Noir and Chardonnay) wineries in CA and OR of late, I have heard from many that Dtc sales are down. I was surprised that many wineries had plenty of wines for sale back to the 2011 vintage. The small winery with limited marketing clout, without a prestigious long standing label, and with limited exposure in the wine press is particularly vulnerable now. Another observation is that premium Pinot Noir producers are currently offering their fall release and often following up with two or three emails reminding those on mailing list of the offering meaning wines did not sell out with initial offering.

Regarding "The small winery with limited marketing clout, without a prestigious long standing label, and with limited exposure in the wine press is particularly vulnerable now."

See these articles on the difficulty of dealing with distributors, in a era dominated by lucrative spirits sales.

(Recall the press reports that George Clooney and his partner's Casamigos tequila company commanded a purchase price of upwards of $1 billion.)

Excerpt from Wine Spectator Online(November 12, 2013):

"West Coast Wineries Are Up for Sale -- Quietly”

(A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)

http://www.winespectator.com/webfeature/show/id/49221#.UoI_yAMMzG8

By Tim FishSenior Editor

“. . . While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle -- annual production of 5,000 to 15,000 cases, for example -- can’t get much attention from distributors unless the brand is hot.”

"John Collins, CEO of a company called GreatVines that sells alcohol distribution software, started the week off with a slap in the face to all wine companies: 'None of the wine companies are getting any attention (from distributors). Period. Because the spirits companies are that important to the distributors.'

"Collins compared the profit size of Diageo, a huge spirits company, to Jupiter. Gallo, the largest wine company, is Neptune. And if Gallo doesn't matter to a big distributor like Southern Glazer's, no wine company does. . . ."

"The opposite of Constellation was a presentation by Bruno Walker, director of sales and marketing for Chambers and Chambers Wine Merchants, a California distributor with an outstanding fine wine portfolio.

"Walker was one of several speakers to caution people that large distributors won't do much to sell wines by small wineries.

" 'If your wine is not on some kind of special of the month, it won't sell' at a big distributor, Walker said. 'That sales person is not out making presentations of your wine. Their manager is telling them, you've gotta sell this and you've gotta sell that. That's how their bonuses work. That's how they're hired and fired.'

"But Walker also chilled expectations for what a distributorship like his can do.

[Excerpt: “Some types of luxury goods, such as high-end wines, designer handbags, and luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products.”]

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